Jump Start eBay Stock With Covered Calls

by Tyler Craig | September 27, 2013 10:33 am

Some stocks have spent 2013 showering investors with profits. Others, like eBay (EBAY[1]), have taken shareholders on a circuitous route to nowhere. And don’t think the absence of notable price appreciation means EBAY stock has been a dull one. On the contrary, its story this year has been one full of gaps, volatility and surprising twists and turns.

Ebay stock has had no less than nine different 10% swings — that’s about one per month, which places its behavior squarely between madness and insanity.

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Any time short-term behavior turns crazy, a look at the bigger picture can help bring clarity to the charts.

This year’s volatility bonanza on the daily chart of eBay stock has taken on the form of a multimonth base in the midst of an impressive uptrend on the weekly chart. Consider the ongoing pause a well-deserved breather after the stock almost doubled in value in 2012. This year’s consolidation zone is well-defined by support at $50 and resistance at $57.50. A successful break above the upper band might well indicate that eBay’s next advance has begun.

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If you’re a directional trader looking for a strategic entry to the king of online auctions, buying EBAY on a breakout over the $57.50 resistance zone is probably as good as any. If Thursday’s 4.5% surge is any indication, perhaps the current rebound will be the one that finally sends eBay stock to new heights.

So long as EBAY languishes in its range-bound prison, shareholders could tap into the income-producing qualities of options to boost returns.

Selling upside calls offers the dual benefit of passive income and downside protection. By selling a call option — one for every 100 shares you own — you obligate yourself to sell your stock at the strike price. In exchange for bringing on the obligation, you are compensated by receiving some cash.

With EBAY trading around $56, you could sell the Oct 57.50 call, targeting a price of $1.50. If the stock remains below the strike price of $57.50, the call will expire worthless, allowing you to pocket the entire $1.50, which generates a 2.6% return on investment over the next 20 days. As long as the stock doesn’t rise above $59 by October expiration, shareholders will generate a superior return by selling the covered call. Once eBay stock rises above this point — which is well above major resistance — stockholders without the covered call will produce more profit.

In summary, if you want to buy EBAY, wait for a breakout; if you already own it and don’t believe it will climb above $59 this month, sell a covered call.

If you think eBay stock has the mustard to clear $59, just sit tight and let the profits roll in.

As of this writing, Tyler Craig did not hold a position in any of the aforementioned securities.

  1. EBAY: http://studio-5.financialcontent.com/investplace/quote?Symbol=EBAY

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